What Small Businesses Need to Know About Illinois Secure Choice
Companies with 25-99 employees must decide whether to opt for a state-mandated retirement plan or private alternative.
Digital Exclusive - 2019
During the past decade, we have seen the rise of state-mandated retirement programs that encourage companies to enroll more employees in long-term retirement plans. These initiatives reflect the unfortunate reality that there is a looming retirement crisis in America — as pension plans phase out and Social Security funds dwindle, we could see a significant increase in people who simply can’t afford to retire.
Oregon has led the charge in combating this by launching its state-sponsored IRA program, OregonSaves, which requires businesses with five or more employees to either enroll in the state’s payroll-deduct IRA or sign up for a private qualified retirement plan like a 401(k). On the heels of Oregon’s efforts, Illinois established its Secure Choice
retirement savings program, which entails a similar auto-enroll IRA product that businesses must provide for their employees unless they choose a private alternative.
For Illinois-based companies with 25 to 99 employees, the deadline to register for the Secure Choice program is rapidly approaching on November 1. This means local small business owners will soon face a crucial decision.
Benefits of Secure Choice
The biggest positive of the Secure Choice program is that it has raised awareness about a pressing need in the local business community. There are more than two million workers
in Illinois today without access to a 401(k) or other long-term retirement solution. Historically, retirement plans have not been considered a core benefit for small businesses and have been brushed aside in favor of healthcare or payroll. This movement is legitimizing the fact that retirement is an essential benefit for businesses of all sizes.
Auto-enroll plans, like the one offered in the Secure Choice program, also tend to be very successful in engaging employees because no action is required on their part. They can choose to opt out if they want, but don’t need to take any steps to opt in. This makes it easy to quickly onboard a large percentage of your workforce. In fact, since its inception in July 2017, the OregonSaves program has seen a 70% enrollment rate, and we expect to see similar participation results in Illinois’ Secure Choice.
Lastly, IRAs tend to be more portable than other types of retirement plans. Meaning, you can more easily transfer your retirement assets from one employer to another with a state-sponsored IRA than you could with a 401(k). The process for transitioning a 401(k) can be a little more complicated, so the state program could help ease some administrative headaches for both employees and employers down the line.
Drawbacks to Secure Choice vs. a 401(k)
However, there are several important drawbacks to enrolling in the state-sponsored IRA vs. a 401(k) that small businesses and their employees should closely consider.
Perhaps the biggest shortcoming to the state’s auto-enroll IRA is the limit on annual contributions. The maximum individual contribution for an IRA in 2019 is $6,000, compared to $19,000 for a 401(k). That means you can save over three times more each year with a 401(k). When you think about the impact of compound interest, this limitation can greatly reduce your ability to reach retirement goals.
Consider that if someone starts funding an IRA at age 30 and contributes the maximum $6,000 every year until turning 65 with a 5% average annual market return, they will reach about $575,000 in savings. By comparison, someone who funds a 401(k) with the maximum $19,000 each year will have a projected retirement balance of approximately $1.8 million over the same timeframe.
Another disadvantage to the Secure Choice program and similar state-mandated retirement plans is the limited investment selection. These plans typically have a limited fund lineup mostly composed of target-date funds offered by only three or four fund families. 401(k)s, on the other hand, generally offer a more diverse, lower-cost range of investments that can be customized by the employer.
Cost could also become a significant factor for Secure Choice participants. State programs generally target people who are just starting to save and don’t have much money tucked away yet. As such, they tend to charge an asset-based fee. Illinois' program, for example, charges a fee of 75 basis points. When you are first starting out, this seems fairly cheap. But as assets accumulate over time, that fee starts to add up more and more. Alternatively, many 401(k) providers now offer flat monthly fees so you know exactly how much you will have to pay each month -- like a Netflix subscription for your retirement account. With this model, costs are significantly limited as assets grow, enabling participants to save more in the long term.
It’s also worth noting that business owners receive a tax credit of $500 for participating in a 401(k), which can help offset administrative and setup costs. There is currently no tax benefit offered to employers who opt for an auto-enroll IRA.
For small businesses in Illinois, it is crucial to do your research before making a decision ahead of the Nov. 1, 2019 Secure Choice registration deadline. While a low-cost option offered by the state might seem appealing, it is in your best interest to investigate all the alternatives before jumping in.
The market is still watching to see how these state-mandated plans will play out. Like any new offering, there are bound to be some operational hurdles along the way. On the other hand, many 401(k) providers have a proven track record of success and can offer a more streamlined integration process.
While we should applaud states for taking action to help increase access to retirement savings, there may be a better option for your business.
Ashvin Prakash is based in Chicago and serves as Director of Product Development for Ubiquity Retirement + Savings.